Opinion
Case No. SA CV 02-301-GLT (MLGx).
December 6, 2004
ORDER GRANTING DEFENDANTS' MOTION FOR SUMMARY JUDGMENT AS TO PLAINTIFFS WHO BENEFITTED FROM ALLEGED INFLATION
Defendants' motion for summary judgment as to Plaintiffs who benefitted from alleged inflation is GRANTED.
I. BACKGROUND
Plaintiffs, stockholders of Defendant Broadcom, allege Defendants inflated the company's reported earnings and misled investors through a series of misrepresentations and fraudulent accounting methods between July 31, 2000 and February 26, 2001. Plaintiffs allege causes of action under section 10(b) of the Securities Exchange Act and Rule 10b-5. Plaintiffs opted not to join a consolidated class action against the Defendants; instead, they sue as individuals.
Defendants move for summary judgment on damages. Defendants argue twenty-six of the forty-seven Plaintiffs cannot establish damages because they profited from the alleged fraud by selling their shares of stock at an artificially inflated price. Because damages is an element of Plaintiffs' prima-facie case, and because Plaintiffs cannot establish it, Defendants ask the Court to grant their motion for summary judgment.
Following oral argument on October 4, 2004, the Court took under submission Defendants' motion and Plaintiffs' request for additional briefing. On October 6, 2004, the Court ordered additional briefing. The briefing is now in, and the Court rules as follows.
II. DISCUSSION
Summary judgment is proper if "there is no genuine issue as to any material fact and . . . the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c).
Defendants contend twenty-six Plaintiffs actually profited from selling Broadcom stock at an artificially inflated price. (Defs.' Supplemental Mem. Supp. Summ. J. at 2.) Defendants conclude Plaintiffs cannot establish damages, which is a required element under their prima-facie case.
Plaintiffs argue Defendants' contention is based on applying the "last in, first out" ("LIFO") accounting methodology, which is not supported by the case law. The case law, according to Plaintiffs, supports application of the "first in, first out" ("FIFO") methodology. Moreover, Plaintiffs' expert claims the FIFO methodology is customarily required in calculating damages in this type of case, not the LIFO methodology (Hakala Decl. ¶¶ 6-7), and applying the FIFO methodology demonstrates the presence of damages.
A number of courts have spoken clearly on this issue, treating it as a pure question of law and finding the FIFO methodology improper. See, e.g., In re Cable Wireless, PLC, Sec. Litig., 217 F.R.D. 372, 378-79 (E.D. Va. 2003) ("[C]ourts have generally rejected FIFO as an appropriate means of calculating losses in securities fraud cases.") (internal quotation marks omitted); In re Clearly Canadian Sec. Litig., Nos. C-93-1037-VRW, C-93-1278-VRW, C-93-4313-VRW, C-95-0699-VRW, C-95-2295-VRW, 1999 WL 707737, at *4 (N.D. Cal. Sept. 3, 1999) ("[U]se of the `first in, first out' method . . . will identify damages where in reality there may be none; the `FIFO' assumption is in no way based on actual trading practices in general, let alone the trades of actual claimants.").
In re Comdisco Securities Litigation, 150 F. Supp. 2d 943, 945-46 (N.D. Ill. 2001) also rejected the FIFO methodology, stating:
when the Class Period . . . is focused upon, PASERS' claim that it suffered some $2.4 million in losses in connection with its investment in Comdisco common stock is only a mirage created by PASERS' adoption of a FIFO (first-in-first-out) approach to its dealings in the stock. . . . And when those transactions are properly matched, rather than by the impermissible application of a FIFO methodology . . . PASERS' Class Period sales at inflated prices caused it to derive unwitting benefits rather than true losses from the alleged securities fraud. . . . There are a host of cases . . . that reject the kind of artificial "loss" that is manufactured by PASERS' attempted FIFO construct in favor of a calculation that properly nets out purchases and sales during the class period and determines gains or losses in those terms.Id.
Plaintiffs' expert claims FIFO is "customarily required" in calculating damages. (Hakala Decl. ¶ 6.) As the cases demonstrate, however, the issue of which accounting methodology applies is a question of law, not fact, for the Court to decide.Crow Tribe v. Racicot, 87 F.3d 1039, 1045 (9th Cir. 1996).
Plaintiffs cite In re Chipcom Corp. Securities Litigation, No. CIV. A. 95-11114-DPW, 1997 WL 1102329, at *24 (D. Mass. June 26, 1997), in support of their position. This case is inapposite. While it does include seemingly on-point language — "the FIFO (first-in-first-out) matching basis will be applied" — the language is recited in the court's summary of the parties' settlement agreement; the decision itself does not address the issue.
Applying a LIFO methodology is supported by adequate authority, especially in light of the body of case law rejecting FIFO.
The authority is clear: where a plaintiff engages in multiple purchases and sales during the period in which the stock is inflated, the proper damages methodology is to take all the inflation losses resulting from all purchases at the inflated price and reduce this amount by all the inflation gain resulting from all sales at the inflated price. See Wool v. Tandem Computers Inc., 818 F.2d 1433, 1437 n. 4 (9th Cir. 1987); In re Seagate Tech. II Sec. Litig., 843 F. Supp. 1341, 1349 n. 7 (N.D. Cal. 1994).
Plaintiffs attempt to distinguish Wool, arguing the Wool plaintiffs bought and sold stock during the period of inflation and, therefore, the Ninth Circuit did not need to decide what sales and purchases to match (i.e., what accounting methodology to apply). Here, Plaintiffs argue stock was held before the period of inflation, thereby raising the issue of methodology.
This factual distinction does not overcome the language inWool, which establishes a general principle applicable here. In re Seagate makes the point even clearer.
III. DISPOSITION
Defendants' motion for summary judgment as to Plaintiffs who benefitted from alleged inflation is GRANTED. The following Plaintiffs cannot show they were damaged as a result of the conduct alleged in the First Amended Complaint:
1. Alexander R. Brishka, as an individual
2. Ilma Brishka, as an individual
3. Alexander R. Brishka and Ilma Brishka, as trustees of the Brishka Trust
4. Timothy J. Buckley, as an individual
5. Compass Communications, a Grand Cayman Islands Company
6. Robert J. Follman, as an individual
7. Carole A. Follman, as an individual
8. Robert J. Follman and Carole A. Follman, as trustees of the Robert J. and Carole A. Follman Living Trust
9. Robert J. Follman and Carole A. Follman, as administrators of the Robert J. Follman IRA Rollover
10. Robert J. Follman and Carole A. Follman, as administrators of the Carole A. Follman IRA
11. Jeff D. Martin, as an individual
12. Jill D. Martin, as an individual
13. Jeff D. Martin and Jill D. Martin, as trustees of the J. J. Martin Trust
14. Jeff D. Martin and Jill D. Martin, as administrators of the Jeff Martin IRA
15. Jeff D. Martin and Jill D. Martin, as administrators of the Jill Martin IRA
16. Scott McCarter, as an individual
17. Scott McCarter, as an administrator of the Scott McCarter SEP-IRA
18. Sarajen Capital, LLC, a California limited liability company
19. Ronald E. Tendler, as an individual
20. Ronald E. Tendler, as trustee of the Tendler Family Trust
21. Ronald E. Tendler, as administrator of the J. Edward Company Money Purchase Pension Plan
22. Thomas T. Tierney, as an individual
23. Elizabeth C. Tierney, as an individual
24. Thomas T. Tierney and Elizabeth C. Tierney, as trustees of the Thomas T. and Elizabeth C. Tierney Trust
25. Thomas E. Tucker, as an individual
26. Thomas E. Tucker, as trustee for the Tucker Family Trust